On 1 July 2016, the Federal Government introduced the Foreign Resident Capital Gains Withholding payments regime, which imposes a 10% non-final withholding tax on payments made to foreign residents who dispose of certain taxable Australian property. The regime applies to vendors and purchasers of real estate with a market value of $2 million or above as well as purchasers of indirect Australian real property company title interests (such as unit shares in a company).
Under the regime, unless a vendor of Australian real estate with a market value of $2 million or above produces a clearance certificate or variation notice issued by the ATO, the purchaser is obliged to withhold 10% of the purchase price, and pay this amount to the ATO on or before settlement.
Under changes announced by the Federal Government in the 2017 Budget, the threshold will be reduced from $2million to $750,000 from 1 July 2017, therefore increasing the number of properties and interests subject to this withholding obligation.
The capital gains tax withholding rate will be increased also from 1 July 2017 from 10% to 12.5%.
What property is covered?
The withholding tax applies to all Australian real property including land, buildings, residential and commercial property (and includes options or rights to acquire the relevant property). It also applies (amongst other interests) to lease premiums paid for the grant of leases over real property in Australia.
The regime does not apply to real property transactions with a market value of less than $750,000, transactions listed on an approved stock exchange or insolvent foreign resident vendors.
When do you not need to withhold?
There are two types of declaration that can be made by vendors that allow a purchaser not to have to withhold a part of the purchase price – a residency declaration or a declaration that membership interest is not indirect Australian real property interest. The purchaser is entitled to rely on a declaration provided by the vendor unless they know it to be false. It is important to note however that vendor declarations cannot be used to avoid having the purchaser withhold the 12.5% withholding in relation to the disposal of real property.
What is a clearance certificate?
A clearance certificate is a certificate issued to an Australian resident by the ATO, and once provided to the purchaser, discharges the purchaser from the obligation to withhold the 12.5% of the purchase price. Clearance certificates will now be required by sellers to purchasers of all real property with a market value of $750,000.00 or above.
A clearance certificate is expected to be issued immediately in straightforward cases. In situations where there are data irregularities, issue by the ATO may take between 14-28 days. The certificate is valid for 12 months from the date it is issued, so the vendor may use it for multiple disposals.
Purchaser payment notification
Purchasers required to withhold 12.5% of the purchase price must complete an online ‘Purchaser Payment Notification Form’, and are obliged to pay the amount to the ATO without delay.
If a vendor is not entitled to receive a clearance certificate (and a vendor’s declaration is not suitable) but the vendor nevertheless considers that a withholding of 12.5% of the purchase price of a transaction is inappropriate (for example in circumstances where the vendor will not make a capital gain on the transaction or if proceeds of sale available at settlement are insufficient to cover both the amount to be withheld and the amount required to discharge the debt the property secures) the vendor can make an application to the ATO for a variation.
If you would like to discuss the effect of this regime or your obligations, please contact the Property, Commercial or SME teams at Trinity Law.
The information in this document represents general information, and should not be relied for your specific circumstances. If you require legal advice and assistance on the matters contained or associated in this document you should contact Trinity Law. Subject to the limits of the law, Trinity Law disclaims any liability on persons relying on this document.